Moody's Investors Service published a smaller European version of its U.S. ratings comparison study and found that the pattern of rating differentials for international jointly rated structured finance securities - deals that are rated by Moody's, Standard & Poor's and Fitch Ratings - is broadly similar at the top end of the ratings spectrum.

The U.S. analysis was based on a dataset of about 42,000 joint Moody's/S&P ratings and 23,000 Moody's/Fitch ratings that were outstanding in February 2006. The international structured finance analysis was based on 4000 rating pairs with S&P and 300 pairings with Fitch. According to the study, the number of rating pairs with S&P is less than 10% of the U.S. total, while the number of pairs with Fitch is about 1.3% of the U.S. figure. Moody's broke down its international study into the same broad sectors used in the U.S study: RMBS, CMBS, ABS and CDOs. Manufactured housing, home equity and HELOC securities - which account for a substantial proportion of ABS in the U.S. - were not seen outside the U.S.

On average, the study found that current ratings assigned for jointly-rated international instruments also differ by less than one notch. For securities rated lower by Moody's, the average notch difference was 1.45 and 1.71, compared to S&P and Fitch. For securities rated higher by Moody's, the average gap was 1.39 and 1.49 notches, versus S&P and Fitch ratings, respectively. Moody's found that the rating gap at the Aaa' level is small across all sectors, but is more significant as the ratings move down the spectrum. This pattern is less pronounced among the international deals than in the U.S. market. The average gap starts at just 0.04 of a notch for Aaa'-rated securities, but Moody's ratings are on average between 0.28 and 0.56 of a notch lower for securities that Moody's rates below investment grade. Furthermore, between 27% and 38% of non-Aaa' rated securities were rated lower by Moody's.

The case of triple-As

According to the study, at the triple-A level, credits differ according to the degree to which they meet the rating criteria. While the agencies might not agree on the credit worthiness of these products, the ratings remain identical contributing to a much smaller rating gap. Moody's rating approach also focuses on criteria relating to expected loss, rather than primarily on default probability.

"This difference in focus can result in sizeable rating gaps between Moody's and other rating agencies that focus on default probability," explained Moody's group managing director Detlef Scholz. "And, since loss given default is usually significantly higher on junior tranches, as they tend to be thinner, the rating-gap effect becomes more pronounced at lower rating levels than for Aaa'-rated credits."

But, over time, Moody's said that the joint ratings relationship could see more disparity because of changes in ratings approaches and differences in monitoring practices among the ratings agencies.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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